Applied Rationality focuses on public policy issues and tries to take a liberal perspective that is consistent (comments to the posts will often show otherwise) with neoclassical, rational-choice economics.

Wednesday, September 2, 2009

Qubein's rhetorical math doesn't add up

Several months ago, Moody's Investor Services downgraded bonds that High Point University floated in 2001 from a Baa2 rating to Ba2, meaning that it had judged the bonds to have a "substantial credit risk." Higher education financing is a sensitive issue in Greensboro because of the recent problems of Greensboro College and budget cut-backs at the two large public institutions.

This morning, our local newspaper finally got around to asking the president of HPU, Nido Qubein, about Moody's downgrade.

Qubein used some fascinating rhetorical math in his response. He is quoted

You want to know how seriously I take it? On a scale from 1 to 10, I’d give it a negative 2.

Let's unpack the math. The lowest point on Qubein's scale should represent not paying any attention to the rating (ignoring it and not taking it seriously at all). That would be an appropriate response if the rating is pure noise or doesn't affect any university operations.

Qubein, however, assigned it a "negative 2?" Does this mean that he is treating it unseriously? Maybe he suspects that Moody's is punking him?

Alternatively, Qubein could be indicating that Moody's is way off base in its assessment (with somewhat off base being a zero on this scale and completely off base being a negative one). The negative number might further suggest that Qubein's response as doing exactly the opposite of whatever Moody's would recommend.

Maybe the negative number means a different type of unseriousness--the rating is so bad that it just drives Qubein crazy.

True to his own ranking, Qubein's subsequent responses in the article never acknowledge the underlying problems that led to the rating or the consequences that stem from it.

The underlying problems are a growing amount of debt for the university, a hit to the endowment because of the financial crisis, and a dependence on tuition and student growth for financing.

Qubein dismisses these all. For example, the large debt is "an investment in the future." The article points to rising tuitions and enrollment growth, but the financial model requires still higher tuitions and more growth.

In terms of the consequences, Qubein states that HPU was recently able to float an additional $40 million, but he does not indicate what the financing costs were.

The faculty, staff, and students of HPU deserve a serious response to an independent rating agency's serious assessment of increased risk. President Qubein's lack of seriousness is troubling.